Turkey's Central Bank Defies Erdogan and Holds Interest Rates

Turkey's central bank governor Erdem Basci addresses the general assembly of the bank in AnkaraReuters

Turkey's central bank defied political pressure and held interest rates at the same level for another month, in a move that boosted the lira.

Following a meeting of its Monetary Policy Committee, the bank said that its overnight lending rate will be 12%, its one-week repo rate will be 10% and its overnight borrowing rate will remain 8%.

"Inflation expectations and pricing behaviour will be closely monitored and the tight monetary policy stance will be maintained until there is a significant improvement in the inflation outlook," the bank said in a statement.

The bank has come under pressure from the Turkish Prime Minister Recap Tayyip Erdogan, who called for an interest rate cut in the wake of his party's local election victory.

He claimed that the victory for his AK Party had reduced political uncertainty in the country and that the bank could now afford to reduce interest rates.

Erdogan's comments temporarily heightened fears over the independence of the central bank although Thursday's decision would suggest that independence is still intact.

Analysts believe that rate cuts could be on the cards in the coming months as the presidential elections approach, while the Turkish lira remains susceptible to political risk.

Turkey's decade of economic growth has slowed sharply, with the country missing targets on inflation and consumer confidence.

"Inflation expectations and pricing behaviour will be closely monitored and the tight monetary policy stance will be maintained until there is a significant improvement in the inflation outlook," the central bank said in a statement.

The bank had previously attempted to defend the lira by selling off foreign currency reserves but it resorted to interest rate hikes in January as the pressure on the currency increased.

Following Thursday's announcement, the lira strengthened to 1.3 to the dollar at 1123 GMT, down from 1.4 before the announcement.